'Dark pool' trading OK, say experts

Lucy Battersby

THE use of so-called dark pools to privately move large volumes of shares between investors should not be outlawed by regulators, sharemarket experts say.

However, regulators should focus on the price impact which private trades had on public markets, the head of regulatory and public policy for the Australian Securities Exchange said, rather than trying to limit over-the-counter markets.

''It is not the existence of dark liquidity that is the problem,'' Malcolm Starr said, ''it is the absence of any contingency plan to deal with the possibility that spreads will increase in transparent public markets if too many orders are diverted to dark pools.''

Mr Starr made the comments yesterday during a panel discussion on the use of dark pools at the Australian Securities and Investments Commission's summer school.

Dark pools is the name given to off-market trading where institutional investors anonymously shift large parcels of stock to another anonymous trader. Unlike normal share trading, where all buying and selling prices and volumes are public, only the brokers involved in the dark pool trade know the details.

The use of dark pools has been criticised by regulators for distorting price and trading information.

The chief executive of the Oxford Finance Group, Dr Ruben Lee, defended the practice, saying the use of opaque trading techniques was not new. He believes regulators needed to understand the value of dark pools to institutional investors. ''If you require too much transparency and the big investors do not like it, they will find another way of getting their trades done in a more opaque manner.''

Tony Mackay, chairman of Chi-X Global, said dark trading replicated what brokers had always done: finding buyers or sellers for their clients. ''Is a dark pool that is really operating with a broker-sponsored market-maker in the middle of it really a dark pool? Or is it a systematic internaliser?''

Yet dark pool trading in the US was ''out of control'', he added, where large investors could trade up to 5 per cent of a company's stock off-market.